How a Contingency Fee Is Calculated After Litigation Funding Costs and Interest

A contingency case can bring in a large settlement and still produce a thin profit once borrowed case money is paid back. The starting point is not the lawyer’s percentage of the settlement. It is the money left after the funding principal, accrued interest, lender charges, unreimbursed case expenses, and the firm’s own work costs are taken out.

For lawyers understanding Contingency Fee Lawyer Earnings starts with keeping three numbers separate: the client’s recovery, the firm’s contingency fee revenue, and the firm’s actual net profit. Those numbers can move in different directions. A $100,000 recovery with a 33 1/3% fee produces about $33,333 in gross fee revenue, but that is not $33,333 of profit if the firm borrowed money to carry the case.

The fastest check is the latest funding statement. A lawyer can pull it up today and look for the original funded amount, the interest rate, the date interest began, the payoff figure, and any line called an origination fee, facility fee, servicing fee, or minimum charge. The payoff figure, not the amount originally received, is the number that has to be placed into the closing calculation.

Separate contingency fee income from litigation funding costs

The phrase contingency fee litigation funding costs covers more than interest on borrowed money. It can include the amount advanced by the funder, interest that builds while the case is pending, transaction charges, and sometimes a fee charged when the facility is opened or closed. The written funding agreement determines which charges apply and whether interest is simple, compounded, or calculated another way.

A clean case-closing worksheet usually begins with gross funds received. From there, list each deduction in its own line: settlement or judgment amount; client distribution; fee revenue; reimbursed disbursements; funding principal; funding interest; lender fees; payroll and overhead allocated to the file; and remaining profit. Combining all case expenses into one number makes it too easy to miss that interest rose by several thousand dollars during a delayed negotiation.

For example, assume a firm receives $120,000 in settlement proceeds. The signed fee agreement produces $40,000 in gross attorney fees. The firm had advanced $18,000 for records, filing fees, deposition costs, and expert work. It also used $20,000 in litigation funding. If the payoff to the funder is now $25,600, the extra $5,600 is the borrowing cost above principal. That $5,600 reduces the firm’s financial result even though the original $20,000 may have paid legitimate case expenses.

The order in which money is distributed can change the numbers shown on a settlement statement, so the firm should follow its actual agreements and closing documents. For internal profit reporting, however, the core question stays simple: after all obligations tied to the matter have been satisfied, how much of the fee revenue is still available to cover the firm’s labor and overhead?

Calculate interest from the actual funding dates, not a rough estimate

Interest is where a profitable-looking case can turn disappointing. A $20,000 advance at 18% per year costs about $3,600 over 12 months if simple annual interest is used. If the matter remains open for 14 months, that same simple-rate estimate becomes about $4,200 before any lender charges. A monthly rate of 1.5% reaches the same basic annual rate, but compounding can make the payoff higher than a simple-interest estimate.

Do not calculate from the date the client first called or from the date the complaint was filed unless that is also the date funding began. Use the date each advance hit the firm account. If $12,000 was drawn in January and another $8,000 was drawn five months later, each amount may have accrued for a different number of days.

A funding statement may show a daily per diem amount, such as $9.85 per day. That figure is useful near settlement because a payoff quote from Monday can be short by $49.25 on Friday. On a file closing near the end of a month, get an updated payoff dated as close as possible to the expected disbursement date rather than using a statement that is 30 days old.

Watch for charges that do not appear in the interest-rate line. A $750 origination charge, a $300 wire charge, or a 3% facility fee on a $50,000 funding line can affect profit even if the firm never draws the full $50,000. The agreement may also have a minimum interest period, meaning a loan repaid after 45 days may still carry a charge based on 90 days or another stated period.

Use a file-level profit calculation after every funded settlement

A practical formula is: gross contingency fee revenue minus unreimbursed firm expenses minus funding payoff costs not otherwise recovered minus file-specific labor and overhead equals estimated net profit. The funding payoff costs include interest and lender charges, while principal needs careful treatment. If the principal was used to pay expenses that were separately reimbursed in the closing, subtracting it again can double-count the same money.

Here is a fuller example. A case settles for $150,000 and produces a $50,000 gross fee. Case disbursements total $27,500: $350 in filing charges, $2,200 for medical records, $4,800 for deposition services, $7,500 for an expert, and the balance for other work. The firm’s funding payoff is $31,900 on $25,000 borrowed, meaning $6,900 reflects interest and charges. If $27,500 of disbursements is recovered through the settlement, the internal profit calculation should not treat the full $27,500 as an unrecovered loss.

Suppose the firm estimates $16,000 in lawyer time, staff time, and allocated operating cost for the file. Starting with the $50,000 fee, subtract $6,900 in funding cost and $16,000 in internal labor and overhead. The estimated profit is $27,100 before broader firm expenses and taxes. If $5,000 of case expenses were not recovered, the estimated profit falls to $22,100.

This is why gross fees should not be used as a measure of case performance by themselves. Two matters can each produce a $40,000 fee, while one closes after eight months with $1,200 in interest and the other closes after 30 months with $11,000 in interest, two expert reports, and repeated deposition rescheduling costs.

Keep settlement accounting, lender payoff, and case-loss exposure separate

A funded case should have a closing file that contains the settlement statement, the final lender payoff letter, invoices for major expenses, and the internal profit worksheet. Those four documents let the firm trace why the payoff rose and whether the final numbers match the money actually moved. They also make it easier to spot a duplicate invoice, an interest charge calculated past the payoff date, or a funded expense entered twice.

Do not assume every cost belongs to the client, the firm, or the funder without checking the applicable agreements. The client fee agreement may address disbursements one way, while the funding contract addresses repayment another way. A $9,000 expert invoice, for example, may be reimbursed from proceeds, paid from borrowed funds, or remain an unrecovered firm expense depending on the case documents and outcome.

The accounting is different if the case does not recover money at all. Questions about funded advances, expert bills, deposition invoices, and who carries the loss are part of contingency fee case loss expenses. For a settled matter, the useful discipline is to obtain the final payoff, match it to the funding ledger, and calculate profit only after every case-specific cost has a place on the worksheet.